The Greek Crisis

Thursday, July 30, 2015

The International Monetary Fund’s board has been told Athens’ high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the institution will join the EU’s latest financial rescue.

The determination, presented by IMF staff at a two-hour board meeting Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the Fund will not decide whether to agree a new programme for months – potentially into next year.

That delay could have significant repercussions – particularly n Germany, where officials have long said it would be impossible to win Bundestag approval for the new €86bn bailout without the IMF on board.

According to a four-page “strictly confidential” summary of Wednesday’s board meeting obtained by the Financial Times, IMF negotiators will “participate in policy discussions” to ensure the eurozone’s new bailout “is consistent with what the Fund has in mind”.

But they “cannot reach staff level agreement at this stage.” The Fund will only decide whether to participate during a “stage two” after Greece has “agreed on a comprehensive set of reforms” and, crucially, after eurozone bailout lenders have “agreed on debt relief”.

Monday, July 27, 2015

It is easy to see Greece as a clash between “austerity” and “progressive economics,” with the Germans (and Finns and Dutch, alongside various international public servants and economists) on one side, and Keynesians and progressives on the other as Paul Krugman’s recent CNN interview suggests. This has certainly been the picture painted by Syriza, the left-wing political party of Greek Prime Minister Alexis Tsipras, and by many friends of Greece and progressive economists.

The reality, though, is more complicated. To be sure, excessive austerity is bad macroeconomic policy. But the issue at stake isn’t just austerity. The issue is that Greek “resistance”—not just Syriza’s, but also that of the previous government—takes the form of protecting rent-seekers. This is where the July 2012 memorandum of understanding between Greece and the Troika (the International Monetary Fund, European Central Bank, and the European Commission) failed miserably; the previous government, much like Syriza, wanted to preserve the status quo.

Greece’s main economic problem is structural and an exit from the Eurozone will not solve it. Besides the short-term costs of such a move, history shows us that Greece has never managed to benefit from currency devaluations. What’s more, the recent McKinsey study on Greek competitiveness shows that the country’s biggest challenge has been a lack of investment.

There are so many ways things could go wrong in Greece that it’s easy to miss how things could also go right. The best-case scenario involves the European Central Bank including Greek bonds in its quantitative easing programme, the lifting of capital controls and a deal on debt relief – all by the end of the year.

This is not a prediction. Trust between Greece and the other euro zone countries has been all but destroyed. Hard-line creditors, led by Germany, will only help Alexis Tsipras, the prime minister, if he implements diligently what he has agreed. That is far from given, now that his radical-left Syriza party is splintering, even though that also gives him opportunities.

However, if Tsipras can rebuild trust and follow through on his commitments, there is a clear path out of misery.

In July 4th, the night before a referendum asked the Greek people to decide how far their debt-ridden government should accommodate the demands of its main creditors—the “troika” of the European Union, the European Central Bank, and the International Monetary Fund—Yanis Varoufakis, the country’s minister of finance, sat outdoors at an Athens restaurant, wearing a T-shirt with an outline of Texas on the front. In January, Varoufakis, an economist who had been teaching at the University of Texas at Austin, abruptly entered Greek politics, becoming the public face of the country’s defiant negotiations with European leaders. After months of fatigue, he had slept for much of the day, and he was in a good mood. Varoufakis, who is fifty-four, had the peace of mind of someone who was certain of an election result and already savoring the satisfactions to follow. His government, the left-wing Syriza party, would lose. The people would vote “yes”—that is, in favor of making more concessions than Varoufakis and Alexis Tsipras, the country’s forty-year-old Prime Minister and the leader of Syriza, had said that they could stomach. Varoufakis would resign as a minister, and would never again have to endure all-day meetings in Brussels and Luxembourg, listening to other European finance ministers scold Greece for its disobedience. And he would no longer need to marshal scant supplies of discretion to disguise the fact that he and Tsipras had, in recent weeks, lost significant faith in each other. Varoufakis had not given up his hostility toward the troika, or the economic arguments underpinning that hostility, but he spoke as if Syriza’s weeklong campaign of slogans and street protests in support of ohi—“no”—were already archived in Greece’s long history of resistance to external aggressors. A “yes” vote, Varoufakis declared, was “inevitable.”

He was with his wife, Danae Stratou, an artist whose work mainly involves installations and photography, and his friend James Galbraith, an American economist who is a professor at the University of Texas. Galbraith had been acting as an unpaid adviser on an informal international team that included Jeffrey Sachs, an economist at Columbia University. According to Varoufakis, Sachs had been sending “missives for the past two weeks, saying, ‘Demand debt relief. You need it. If it’s not granted, then default.’”

Saturday, July 25, 2015

As the Greek crisis proceeds to its next stage, Germany, Greece and the triumvirate of the International Monetary Fund, the European Central Bank and the European Commission (now better known as the troika) have all faced serious criticism. While there is plenty of blame to share, we shouldn’t lose sight of what is really going on. I’ve been watching this Greek tragedy closely for five years, engaged with those on all sides. Having spent the last week in Athens talking to ordinary citizens, young and old, as well as current and past officials, I’ve come to the view that this is about far more than just Greece and the euro.

Some of the basic laws demanded by the troika deal with taxes and expenditures and the balance between the two, and some deal with the rules and regulations affecting specific markets. What is striking about the new program (called “the third memorandum”) is that on both scores it makes no sense either for Greece or for its creditors.

As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the I.M.F. for help. This resulted not just from austerity but also from so-called structural reforms, where too often the I.M.F. was duped into imposing demands that favored one special interest relative to others. There were hundreds of conditions, some little, some big, many irrelevant, some good, some outright wrong, and most missing the big changes that were really required.

Friday, July 24, 2015

Arresting the central bank’s governor. Emptying its vaults. Appealing to Moscow for help.

These were the elements of a covert plan to return Greece to the drachma hatched by members of the Left Platform faction of Greece’s governing Syriza party.

They were discussed at a July 14 meeting at the Oscar Hotel in a shabby downtown district of Athens following an EU summit that saw Greece cave to its creditors, leaving many in the party feeling despondent and desperate.

The plans have come to light through interviews with participants in the meeting as well as senior Greek officials and sympathetic journalists who were waiting outside the gathering and briefed on the talks.

They offer a sense of the chaos and behind-the-scenes manoeuvring as Greece nearly crashed out of the single currency before prime minister Alexis Tsipras agreed to the outlines of an €86bn bailout at the EU summit. With that deal still to be finalised, they are also a reminder of the determination of a sizeable swath of Mr Tsipras’ leftwing party to return the country to the drachma and increase state control of the economy.

In the early days of the Greek debt crisis, two German politicians came up with a radical solution: Greece should sell off some of its uninhabited islands and property to pay back its creditors. “Sell your islands you bankrupt Greeks! And sell the Acropolis too!” was how the German tabloid Bild summed up their idea.

While selling off ancient monuments was never a serious idea, the privatisation of state assets has always been an integral feature of Greece’s international bailouts. Over the past five years, Greece has faltered on promises to sell vital parts of its infrastructure – ports, airports, marinas and waterworks – in exchange for billions of euros in loans.

Privatisation remains a vital element of Greece’s latest bailout deal. Under threat of being forced out of the eurozone, Athens agreed to transfer “valuable assets” to an independent fund, with the aim of raising €50bn (£35bn). Half the proceeds will be used to shore up capital reserves at Greek banks; a quarter will be used to repay Greece’s creditors, and the remainder will be spent on unspecified investments.

During the long night of negotiations over Greece on July 12-13, something fundamental to the European Union cracked. Since then, Europeans have been living in a different kind of EU.

What changed that night was the Germany that Europeans have known since the end of World War II. On the surface, the negotiations were about averting a Greek exit from the eurozone (or “Grexit”) and the dire consequences that would follow for Greece and the monetary union. At a deeper level, however, what was at stake was the role in Europe of its most populous and economically most powerful country.

Germany’s resurgence after World War II, and its re-establishment of the world’s trust (culminating in consent to German re-unification four and a half decades later), was built on sturdy domestic and foreign-policy pillars. At home, a stable democracy based on the rule of law quickly emerged. The economic success of Germany’s welfare state proved a model for Europe. And Germans’ willingness to face up to the Nazis’ crimes, without reservation, sustained a deep-rooted skepticism toward all things military.

Thursday, July 23, 2015

Greece is bracing for the return to Athens of officials representing the reviled “troika” of creditors as the debt-stricken country prepares to start negotiations for a third bailout.

Mission chiefs with the EU, European Central Bank and International Monetary Fund fly into the Greek capital on Friday for talks on a proposed €86bn (£60bn) bailout, the third emergency funding programme for Athens since 2010.

The return of the triumvirate, a day after internationally mandated reforms were pushed through the parliament by MPs, marks a personal defeat for the prime minister, Alexis Tsipras, who had pledged never to allow the auditors to step foot in Greece again.

How Greeks will react remains unclear, with much depending on media coverage.

“The press will almost certainly make a big deal out of this and the government will try to play it down,” said Aristides Hatzis, a leading political commentator. “But given what people have gone through recently it might seem rather trivial and that is to Tsipras’ advantage. Their presence will definitely reinforce the realisation that another bailout is here.”

If there’s one message that Greece should take away from its recent confrontation with the euro zone, it’s that it will never get the help it really needs. Assuming that the deal goes through, Greece should be able to reopen the banks and keep the economy from total collapse. But, with that economy having shrunk by a quarter in five years and an unemployment rate over twenty-five per cent, it needs real stimulus spending and a much looser monetary policy. Neither is on offer. Even if Greece gets the debt relief that the I.M.F. is recommending, the next few years will be grim. As James Galbraith, an economist at the University of Texas at Austin, who assisted the former Greek finance minister during this year’s negotiations, told me, “What’s going to happen in Greece is going to be very sad.”

So what can Greece do? It really has only one option—to make the economy more productive and, above all, to export more. It’s easy to focus on Greece’s huge pile of debt, but, according to Yannis Ioannides, an economist at Tufts University, “debt is ultimately the lesser problem. Productivity and the lack of competitive exports are the much more important ones.”

There are structural issues that make this challenging. Greece is never going to be a manufacturing powerhouse: almost half of all Greek manufacturers have fewer than fifty employees, which limits productivity and efficiency, since they don’t enjoy economies of scale. Greece also has a legal and business environment that discourages investment, particularly from abroad. Contractual disputes take more than twice as long to resolve as in the average E.U. country. Greece has been among the most difficult European countries in which to start and run a business, and it has myriad regulations designed to protect existing players from competition. All countries have rules like this, but Greece is an extreme case. Bakeries, for instance, can sell bread only in a few standardized weights. Recently, Alexis Tsipras, the Greek Prime Minister, had to promise that he would “liberalize the market for gyms.”

Once again, it was an agonisingly long piece of Greek parliamentary theatre. But once again, in the early hours of Thursday morning, Alexis Tsipras came out on top.

For the second time in a week, the prime minister survived a mini-rebellion in his radical leftist Syriza party and, with the help of opposition parties, passed a set of reforms required to secure a new, €86bn financial rescue from Greece’s international creditors.

There is no doubt about it, Mr Tsipras is for the time being lord and master of all he surveys on the Greek political scene. His craftiness, his tactical agility and his recent, chameleon-like changes of political colour remind me a bit of François Mitterrand, the French president from 1981 to 1995 – of which more below.

No wonder Mr Tsipras’s strategists talk openly about calling a snap election in September or October as a way of sealing his supremacy. The prime minister still enjoys broad support from the Greek public, because they admire the way he has tried – as many Greeks see it – to stand up bravely to the cold-blooded northern European-dominated creditors.

Wednesday, July 22, 2015

Now that Greek banks have reopened and the government has made scheduled payments to the European Central Bank and the International Monetary Fund, does Greece’s near-death experience mark the end of the euro crisis? The conventional answer is a clear no.

According to most economists and political commentators, the latest Greek bailout was little more than an analgesic. It will dull the pain for a short period, but the euro’s deep-seated problems will metastasize, with a dismal prognosis for the single currency and perhaps even the European Union as a whole.

But the conventional wisdom is likely to be proved wrong. The deal between Greece and the European authorities is actually a good one for both sides. Rather than marking the beginning of a new phase of the euro crisis, the agreement may be remembered as the culmination of a long series of political compromises that, by correcting some of the euro’s worst design flaws, created the conditions for a European economic recovery.

We learned on Monday that Yuri Milner, the billionaire Russian entrepreneur, is to spend $100m of his own money over the next 10 years to fund a project searching for alien civilisations beyond our solar system.

According to my calculations, that is $100m more than the Russian government has offered in financial aid to Greece since the radical leftist Syriza party, often presumed to be close to Moscow, came to power in January.

During Syriza’s chaotic six months in office, the notion has cropped up time and again that Alexis Tsipras, the prime minister and party leader, would like to play a ‘Russian card’ to ward off pressure from Greece’s eurozone creditors.

There is something to this, but the picture is more subtly textured than first impressions might suggest. Let’s look below the surface and find out what’s going on.

Greece just narrowly avoided crashing out of the euro but for sceptics the clock is already ticking on when large-scale default and exit from the "irreversible" euro club are raised once again.

When it is - be that in two months or two years - the lessons from Argentina are sure to be revisited.

Argentina's $100 billion (64 billion pounds) default in 2001 was the largest in history. It yanked the peso from its peg to the dollar and resulted in a 75 percent devaluation.

This shattered the economy. Real gross domestic product slumped 15 percent, inflation reached 40 percent, and household and business finances were crippled. To this day, the government remains cut off from international capital markets.

On the eve of his election in January, Prime Minister Alexis Tsipras of Greece talked with pride about how his leftist Syriza party rejected “the mentality of establishment parties” and provided space for the diverse views of its members.

But last week, Mr. Tsipras ousted members of his cabinet who had defied him by voting against the package of austerity measures that Greece’s European creditors had demanded as the price of new bailout negotiations. To Syriza members of Parliament who voted against that package and are threatening to oppose a second bill scheduled for a vote on Wednesday, Mr. Tsipras has made clear that he might call a new election and replace them with a slate of lawmakers loyal to him.

If Mr. Tsipras was an idealistic young radical six months ago, dedicated to the overthrow of the Greek establishment and austerity policies, he is emerging from the showdown with the creditors as something else entirely: a popular, canny and pragmatic politician with a stake in the success of the very measures he came to power vowing to eradicate.

Tuesday, July 21, 2015

The negotiations leading up to the latest tentative deal on Greece’s debt brought into relief two competing visions of the European Union: the flexible, humane, and political union espoused by France, and the legalistic and economy-focused union promoted by Germany. As François Heisbourg recently wrote, “By openly contemplating the forced secession of Greece [from the eurozone], Germany has demonstrated that economics trumps political and strategic considerations. France views the order of factors differently.” The question now is which vision will prevail?

The Greeks, for their part, have been putting their national identity ahead of their pocketbooks, in ways that economists do not understand and continually fail to predict. It is economically irrational for Greeks to prefer continued membership in the eurozone, when they could remain in the EU with a restored national currency that they could devalue.

But, for the Greeks, eurozone membership does not mean only that they can use the common currency. It places their country on a par with Italy, Spain, France, and Germany, as a “full member” of Europe – a position consistent with Greece’s status as the birthplace of Western civilization.

Don’t pack away the currency presses just yet, Greece’s euro exit may be back on the table next year.

There’s still a danger that Greece will be forced out of the euro region by the end of 2016, according to 71 percent of respondents in a Bloomberg survey of 34 economists. Seventy percent said they reckon Greece should be safe for the rest of 2015, though almost half said they thought the 86 billion-euro ($93 billion) bailout package Prime Minister Alexis Tsipras is targeting will prove to be too small.

While Tsipras is checking off the requirements to qualify for a third bailout, the flaws in the agreement he hammered out with euro-area leaders last week are fueling concerns that Greece will struggle to implement the three-year program.

The European creditors are refusing to firm up their commitment to restructuring Greece’s debts, a move the International Monetary Fund says is essential for the country to stabilize its finances. There are also doubts about the 50 billion-euro target for asset sales and, more fundamentally, the merits of forcing more austerity on a shattered economy.

“Without some form of debt relief, the package will never be big enough,” Peter Dixon, a global economist at Commerzbank AG in London, said in his response to the survey. “Loading additional loans onto a country which cannot afford to repay them corresponds to Einstein’s definition of insanity: Trying the same thing over and over again in the expectation of different results.”

Monday, July 20, 2015

The economic rollercoaster that Greece has been riding in the last few months has thrown out some unusual patterns. As the country's referendum was called, quickly followed by capital controls that have seen Greek banks close for business, many Greeks who didn't move their finances out of their bank accounts in time went on an unprecedented spending spree.

Greeks are currently restricted to a daily cash withdrawal limit of 60 euros ($65). This limit however doesn't apply to purchases with credit or debit cards, and Greeks have been exploiting that. Scared that the capital controls would get worse and they would lose their savings, Greeks went shopping for TVs, cars, jewelry, smartphones and electronic goods to the point that Dixons Carphone, the parent company of the Greek electronics brand Kotsovolos, reported that sales of big ticket items like large screen TVs in the Greek market had helped boost their profits to May by 21 percent compared to last year.

Zolotas, the jewelry brand made famous by Jackie Onassis and Elizabeth Taylor, recently had a customer try to buy one millions euros worth of jewelry at their flagship central Athens store. They turned him down, preferring to hold on to the stock.

In 2010, the year of their nation’s first €110bn international rescue, plenty of Greeks understood that the state and citizenry had lived for decades beyond their means. The medicine of austerity and economic reform would be bitter, but it had to be swallowed. The paramount need, as for earlier generations of Greeks, was to stay on the path of modernisation and a European identity.

As I am discovering in Athens, the mood today is different. Exhaustion and despair have replaced self-criticism. There is much resentment that five years of medicine seem to have brought little except mass unemployment, failing businesses, a withered welfare state and national humiliation.

Yet the desire for a modern Greece, claiming its rightful place in Europe, is much the same now as in 2010. This explains the apparent paradox that Greeks voted in a July 5 referendum against bailout conditions intended to keep the country in the eurozone, yet state in opinion surveys that they want to stay in Europe’s currency union. Even 66 per cent of Syriza voters are pro-euro.

Central bankers sometimes distinguish between peacetime, when economies are running relatively normally, and war, when there is a financial crisis. Mario Draghi is having a good war.

The European Central Bank president has done almost everything he can to keep Greece in the euro without breaking his organisation’s rules. Although Draghi has been attacked by Athens for asphyxiating the country and by hardliners for being lax, he has got the balance about right.

Greece’s radical left government has complained that the ECB cut off funding to the country’s banks in order to bring it to heel and accept more austerity. Some wilder voices have even argued that the ECB deliberately provoked a depositor run so that it would have an excuse to close the banks.

In fact, Draghi has been holding off hardliners on the ECB’s Governing Council who wanted to cut off liquidity to the banks completely. As he said on July 16: “There were some who were actually calling for a cut to zero, which would have caused an immediate collapse of the banking system.”

Greek banks will reopen on Monday as Prime Minister Alexis Tsipras rebuilds his government to shore up support for a bailout agreed with the country’s creditors.

The banks, which have remained closed since June 29, will open July 20, the government said on Saturday. Most capital controls concerning withdrawals and money transfers will remain, and while the daily limit was held at 60 euros ($65), a cumulative limit of 420 euros a week was set, it said.

Lenders will reopen a week after Tsipras and creditors agreed to a bailout program and Greek lawmakers approved legislation needed to release funding for the country. Hours after the vote, the European Central Bank approved emergency financing for the country’s lenders and the European Union finalized a bridge loan on Friday to provide a stop-gap until a full three-year rescue program, worth as much as 86 billion euros, is settled.

“This will improve the image of the economy for Greeks inside the country,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “It’s just the beginning and a more ambitious option wasn’t possible.”

The Greek prime minister has sought to rid his government of hardline leftists who oppose further austerity, reshuffling his cabinet barely 48 hours after dissidents broke ranks over a draconian bailout deal for the debt-stricken country.

In a move aimed squarely at displaying his determination to forge ahead with spending cuts and reforms, Alexis Tsipras replaced leading government ministers. The shakeup marked a decisive split from militants in his radical left Syriza party who had voted against tough measures demanded in return for rescue funds from the EU and IMF.

“It marks the beginning of the end of his relationship with the extremist far-left faction,” said Aristides Hatzis, associate professor of law and economics at Athens University. “But it is also clear that this is a short-term government. Tsipras’s hands are tied because these people still have a strong presence in his parliamentary group.”

The reshuffle saw nine changes overall, with the ousting of energy minister Panagiotis Lafazanis by far the most important. As head of Syriza’s militant Left Platform, the veteran Marxist had led the revolt against policies he said were utterly incompatible with the party’s ideology. Lafazanis was replaced by former labour minister Panos Skourletis.

Friday, July 17, 2015

When Michel Sapin boarded the 10:25 high-speed train from Paris to Brussels last Saturday morning, the French finance minister thought a deal to prevent Greece from crashing out of the eurozone was at hand.

The troika of Greek bailout monitors had given their assent to a reform proposal submitted by Alexis Tsipras, the Greek prime minister. More importantly, German chancellor Angela Merkel had that morning reassured Mr Sapin’s boss President François Hollande that she would not allow “Grexit”.

So when Mr Sapin arrived in Brussels at midday, he received a shock: Wolfgang Schäuble, the German finance minister, was armed with a one-page paper advocating a Greek “timeout from the eurozone” for “at least the next five years” if Athens did not accept the bloc’s exacting conditions for a new bailout.

Even more surprisingly, the temporary Grexit plan appeared to have the backing of Ms Merkel, senior EU officials said. The chancellor had long been seen in Brussels as the good cop to Mr Schäuble’s bad cop. No longer. Ms Merkel told the Bundestag on Friday she viewed a voluntary, organised Grexit as a viable option.

“We knew Germany could go far to exert pressure on Greece, but maybe not this far,” Mr Sapin told the Financial Times. “My trust was shaken.”

This week the Greek parliament agreed to European demands for tough new austerity measures and structural reforms, defusing (for the moment, at least) the country's sovereign debt crisis. Now is a good time to ask: Is Europe holding up its end of the bargain? Specifically, is the euro zone's leadership delivering the broad-based economic recovery that is needed to give stressed countries like Greece a reasonable chance to meet their growth, employment, and fiscal objectives? Over the longer term, these questions are evidently of far greater consequence for Europe, and for the world, than are questions about whether tiny Greece can meet its fiscal obligations.

Unfortunately, the answers to these questions are also obvious. Since the global financial crisis, economic outcomes in the euro zone have been deeply disappointing. The failure of European economic policy has two, closely related, aspects: (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone. The poor overall performance is illustrated by Figure 1 below, which shows the euro area unemployment rate since 2007, with the U.S. unemployment rate shown for comparison.

Mario Draghi surprised his European Central Bank colleagues on Thursday by pushing for an increase in emergency aid to Greek lenders, people familiar with the matter said.

The ECB’s Executive Board had signaled to Governing Council members the previous day that the cap on Emergency Liquidity Assistance of 88.6 billion euros ($96.5 billion) should stay in place, despite a request by the Greek central bank for an extra 1.5 billion euros, the people said, asking not be named as the discussions were private.

The ECB president’s intervention followed events on Thursday morning, when the Greek parliament approved austerity measures linked to an international bailout package in the early hours and euro-area finance ministers later agreed on 7 billion euros of bridge funding. The cash infusions should allow Greece to meet debt repayments, including to the ECB on Monday, reopen its banks and start to repair its economy.

After spending much of the six-month standoff between Greece and its eurozone creditors on the sidelines, Donald Tusk, the former Polish prime minister who is now European Council president, became the central actor in the Greek drama over the weekend when a summit he chaired became the scene of 17-hour marathon talks that finally led to a deal on Monday morning.

In a 90 minute interview with the Financial Times and six European newspapers, Tusk gave a behind-the-scenes account of how the deal was brokered – but he also gave voice to fears that the standoff has given new energy to radical political forces in Europe that has made 2015 resemble 1968. Our full write-up of the interview, focusing on his concerns about renewed radicalisation can be read here.

But as is our practice at the Brussels Blog, we’re providing a transcript of the interview below. It is slightly edited to eliminate occasionally long-winded questions and topics not directly related to the Greek crisis.

Wednesday, July 15, 2015

In dominating the debate over how to address the Greek crisis, Germany has shown that economic success brings political influence, which it wielded last weekend to brush away requests from France and Italy for more lenient treatment of their neighbor.

Not everyone loves German rigidity, but Europe should be grateful for it. While we don’t yet know whether the latest accord will stick, let alone succeed, the requirements are necessary to bring the Aegean country back to economic health and to save its participation in the common currency.

Too often, the debate over Greek economic policy is oversimplified into a classic macroeconomic tussle between “austerity” and “stimulus.”

Prudent fiscal policies are, of course, central to a well-functioning economy. What has gotten less attention — but is equally important — is the need for structural reforms in Greece’s inefficient, overregulated economy.

Dimitris Bokas keeps meticulous records of the bathroom fixtures he sells from his small shop in the quiet middle-class residential neighborhood of Koukaki near the center of Athens — just in case a tax inspector makes a surprise visit to ensure Greece's 23 percent sales tax is being collected and reported correctly.

But Bokas also does installation and repair jobs — and half of those involve cash deals with no receipts for his labor. The result is that a job costing 250 euros ($275) goes for 125 euros because he doesn't charge the client sales tax and Bokas doesn't report the income for taxation. "I've got a receipt for everything I sell in my shop," Bokas said. But tax officials "don't know what my hands do."

This kind of tax dodging is a Greek national pastime, costing the state billions of euros in revenue. Greece promised last week to get tough on tax evasion in return for a third European bailout expected to be negotiated over the next month. The talks, expected to last four weeks, will start if Parliament agrees by Wednesday to eurozone demands including tax hikes and pension cuts.

Tuesday, July 14, 2015

Outside Parliament here Monday night, a small crowd had gathered to protest the bailout deal that Prime Minister Alexis Tsipras was bringing home from Brussels, when a woman tried to burn the flag of his left-wing Syriza party.

She quickly found herself surrounded by other demonstrators who ripped the flag from her hands, telling her that she was going too far.

For someone who has been forced by his nation’s creditors to accept a bailout proposal that backtracks on nearly every campaign promise he made, Mr. Tsipras appears to have political support that is alive and well, even among protesters.

Analyst say he has quickly fashioned an appealing, or at least credible, narrative in the face of what most Greeks consider a negotiating disaster: The deal may be bad, but it was the best we could get and must be carried out in a way that puts average Greeks ahead of the rich, particularly the oligarchs.

Even before he left the loan negotiations in Brussels, Mr. Tsipras was striking that populist note, re-emphasizing a theme that was part of his campaign for office in January and that has surfaced in one form or another in recent years, from both the political right and left across much of Europe.

The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.

In the three-page memo, sent to EU authorities at the weekend and obtained by the Financial Times, the IMF said the recent turmoil in the Greek economy would lead debt to peak at close to 200 per cent of economic output over the next two years. At the start of the eurozone crisis, Athens’ debt stood at 127 per cent.

The memo argues that only through large-scale debt relief — something eurozone officials have fiercely resisted — could Greece see its debt fall to levels where it would be able to return to the financial markets.

“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads.

If Greece implements all the economic measures agreed to with its creditors, the country could end up with a more-flexible economy than Germany.

Many of the overhauls on Athens’ to-do list are inspired by the labor market, welfare and budget measures that Germany enacted in 2003 and 2004, when it was struggling with high unemployment and slow growth.

Others—such as lifting restrictions on Sunday shopping and deregulating pharmacies—go further and would likely face a political and legal backlash if attempted in Germany.

German Finance Minister Wolfgang Schäuble rejected the charge that some of the measures the eurozone creditors are asking from Greece would be no-go areas at home. He also said that Greece’s economic and financial difficulties required more aggressive action.

“You can’t, with all respect, simply compare the situation in Greece with that in other countries. The kind of decisions that Greece has to take, with all respect, are difficult…The comparison isn’t valid, not even for polemic debates,” Mr. Schäuble said Tuesday in Brussels.

This blog draws two lessons from the failed Greek programme. Olivier Blanchard is right that the fiscal adjustment of the last 5 years was unavoidable. An earlier debt restructuring could hardly have prevented it. (1) However, an earlier debt restructuring would have allowed significantly lower primary surpluses from now on and it would have made the programme more credible. Higher confidence in Greece would have provided more political and financial stability, essential ingredients for growth. Financial contagion was probably an incorrect argument for delaying debt restructuring. Even if it had been right though, it did not change the underlying problem of debt unsustainability. (2) Equally important, the IMF failed to prioritise a strategy for Greece to regain competitiveness. The programme initially made a correct diagnosis of Greece’s major competitiveness problem. The problem was a result of the pre-crisis Ponzi scheme with ever-increasing deficits financing higher public salaries and rising pensions. However, conditionality on improving the business environment and product markets, augmenting competition and lowering wages through the abolition of the 13th month salary were weak or absent. This made a turn-around of the economy away from a bloated state sector towards a larger export sector impossible. Contrary to Portugal, exports hardly increased in Greece. Political economy considerations would have called for a frontloading of structural reforms for which the political energy in 2013/14 was clearly lacking – despite later IMF insistence on such reforms. These mistakes raise significant questions on the governance of the IMF. They also call for drawing the right lessons for the third programme.

The IMF’s chief economist, Olivier Blanchard, just came out with a robust defence of the IMF policy choices in Greece. His piece is clear and deserves careful reading and analysis. It is important to understand the key mistakes in the Greek programme and to draw the right conclusions.

Greece's 30 June failure to meet a payment obligation to the International Monetary Fund starkly exposed the wider failure of the Greek financial assistance programme. It was the biggest missed payment in the IMF's history and highlights the uncertain prospects of repayment of the €24 billion the IMF has outstanding to Greece. However, the IMF’s exposure is small compared to the exposure of the euro-area institutions, which amounts to more than €190 billion.

You saw the headlines Monday about a deal for Greece? Well, there is no deal. There are a series of punitive and humiliating diktats from creditors that Greece must legislate into law by Wednesday or take a “time-out” from the eurozone.

Once these creditor demands are met, then Greece will negotiate a new bailout deal. That deal will very likely certainly be a failure for both political and economic reasons. So while the immediate risk of a Grexit from the euro may be slightly lower following this weekend’s summit of European leaders in Brussels, it is materially higher in the long run.

Absent from the all-night negotiations this weekend was any real buy-in from either side of the table.

Creditors have waxed on for years about how it is necessary for Greece to assume “ownership of the program” in order for it to succeed. Never has this been more the case than now. Any deal agreed for Greece will involve a fiscal adjustment so swingeing that Greece is likely to be in recession for at least the next two years. It will be extremely difficult for the Greek people to accept such an adjustment after five years of economic depression. The medicine will be particularly bitter for Greeks to swallow given that the majority of people rejected such measures a week ago in a referendum. Wolfgang Münchau sums it up best when he asks: “Do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work?”

When the financial details are stripped away, the Greek bailout deal reached early Monday morning is really a reassertion of the core idea of post-war Europe — which is that France and Germany will stick together.

The bailout terms are complicated, and they reflect compromises that will anger hard-liners both in Greece, who will see the deal as a diktat by creditors, and in Northern Europe, where many will see it as a capitulation to profligate debtors in Athens.

But the north-south debate misses the essential alignment, which is Paris-Berlin. During the bailout crisis, Europe walked to the brink — not just in terms of a weak Greece exiting the euro zone, but of a strong Germany decoupling from its partners. With Monday’s deal, the core of Europe reaffirmed its partnership, regardless of what happens in the small peripheral country of Greece.

Monday, July 13, 2015

Two questions have been at the heart of the Greek crisis from the start: is the eurozone to be a currency union governed by rules? And is Greece willing and able to reform its economy to cope with the rigors of eurozone membership?

Greece’s leftist government has spent six months trying to tear up the eurozone rulebook with its demands for cash without conditions, while at the same time resisting pressure to reform its dysfunctional state. But following Athens’s near-total capitulation during a weekend of marathon negotiations in Brussels, it is possible the answer to both questions may turn out to be “yes”, in which case Greece and the eurozone may yet avoid disaster.

Sure, the conditions that Athens has had to accept to unlock this deal are demanding, far tougher than anything being demanded of Greece before the original negotiations broke down two weeks ago, let alone when it took office in January.

Even to start talks on a new bailout program, Athens must pass a series of reforms in the Greek parliament that it has been resisting for six months, including changes to the tax and pension system. It must transfer state-owned assets to an investment fund for future privatization over which it won’t have full control. And it must accept detailed product and labor market reforms and overturn recent measures taken unilaterally without the agreement of its creditors.

For years, Greece’s negotiations with its European creditors have featured moments in which all parties stare into the abyss, fear what they see and step back to reach a deal.

On Monday, there was yet another deal. But this time it is one that pushes Greece into the abyss, even if financial markets don’t acknowledge it just yet.

Greece already has 26 percent unemployment, a tourism industry that is suffering as would-be visitors stay away and banks and a stock market that have been closed going on three weeks. Just a week ago, its voters overwhelmingly rejected a bailout offer that was less punitive than the one its leaders just accepted.

Yet the deal that Greek leaders and their creditors reached Monday morning after a brutal series of overnight talks promise to deepen political and economic strains in a country already in depression.

After six months of haranguing, Greece’s Prime Minister Alexis Tsipras finally got the high-level political negotiation with his country’s creditors that he said he wanted. After a brutal 17-hour marathon with other eurozone leaders this weekend, he probably wishes he hadn’t.

The terms to which Mr. Tsipras has agreed as preconditions for negotiating a third bailout amount to a total surrender. His hopes of ending austerity in his country and leading a pan-European revolt against northern fiscal hawks, especially Germany, lie in tatters. He has crossed every one of his red lines, and has committed his government to measures his conservative predecessor would never have dared consider.

Meanwhile, as a result of five months of stalled negotiations and two weeks of shut banks following his disastrous call for a referendum, an economy that was projected to hit 2.9% growth this year has plunged back into what will likely be a severe recession.

Greece will not get very far out of its present morass without coming to grips with how it got there. The country provides a textbook example of a flawed economic system.

The public sector is notorious for its corporatist practice of clientelism to gain votes and cronyism to gain favors -- though some say that Italy and France are as bad. Some evidence suggests the magnitude of this issue: Greece's government pensions relative to productivity are nearly twice Spain's.

The government favors the elites in business with tax-free status.

Some state employees even get a bonus for showing up to work on time.

It is less well-known that Greece's private sector is rife with companies that do not compete with each other and block or impede entry of new firms bearing new ideas. The dearth of competition can be measured: The last available OECD data showed profits as a share of business income at a whopping 46 percent in Greece, far exceeding the shares in the 22 other members. Here Italy was second at 42 percent and France at 41 percent. (The U.K. was at 32, the U.S. at 35 and Germany at 39.) Greece appears to be the most corporatist economy in Europe.

Greece and Europe have reached a deal. It is a humiliating defeat for Alexis Tsipras, Greece’s prime minister, who agreed, among other conditions, to running increasing primary budget surpluses into the future, reforming labor and product markets, reforming pensions, increasing taxes, and creating a $55 billion fund containing state-owned Greek assets that will be privatized for debt repayment, to provide banks with capital, and for investment. In exchange, Greece will receive a bailout of close to $100 billion — a massive amount equal to about 40 percent of Greek GDP. If all parties agree to this deal, Greece would stay in the euro zone.

This deal, though offering significant assistance, is a large intrusion on Greece’s sovereignty. (In fairness to the creditors, many believe that Greece cannot successfully steward that sovereignty. Especially over the last few months, the nation that brought democracy to the world centuries ago makes democracy today look like middle-school student government distracted by summer vacation.) Greece has to accept a suite of policies its citizens rejected at Tsipras’s urging in a referendum just days ago. Europe is micromanaging reforms to Greece’s labor and product markets. Outside institutions will supervise Greece’s domestic economy and an overhaul of its public administration. The $55 billion asset fund will be supervised by Europe. And Greece will have to reverse the spending measures it enacted just months ago.

A firm pledge by Europe to reduce the nominal value of Greece’s debts would have helped the medicine go down. It is unfortunate that it wasn’t included, and that only the possibility of making the debt more sustainable was left on the table.

In the early hours of Monday, Greece and the eurozone stepped back from the brink. Faced with the imminence of Grexit and all its uncertainties, they signed up to a plan that might shore up the crumbling Greek economy and open the door to another bailout deal.

The pact offers no respite from the agonising cycle of negotiation that has dominated the crisis. The proposal agreed to by Alexis Tsipras and the other eurozone leaders merely sets yet another deadline, along with the conditions Athens must meet to avert disaster. The Greek parliament and public will now have their say on the proposal, along with those in other eurozone states. Given the severity of the terms and the fissile state of public opinion, its acceptance cannot be assured.

Even if the deal succeeds in restoring some stability to the shattered Hellenic state, the experience of recent days has been a searing one — not just for Mr Tsipras but for the entire eurozone.

Germany’s approach has left deep scars, enforcing harsh terms on the hapless Greeks and exposing divisions with other more conciliatory voices such as France. Berlin’s rigid stance raises questions about the functioning of the eurozone and the compatibility of Greece’s dire situation with democracy. It prompts deeper concerns about the future of the EU project itself.

For the Greek prime minister, Alexis Tsipras, the hard work begins now. The rescue deal hammered out in Brussels may have brought relief to Athens but its battle-hardened government knows that it also comes at enormous cost.

Within minutes of Tsipras giving his “victory” speech, some in his Syriza party were denouncing the bailout accord – the third emergency funding programme for the debt-stricken country since 2010 – as the harbinger of further catastrophe.

“After 17 hours of ‘negotiations’ the leaders of eurozone member states reached an agreement that was humiliating for Greece and the Greek people,” declared the dissenters, coalesced around the energy minister Panagiotis Lafazanis.

Political tumult beckons. Tsipras returns to Athens with a deal so excoriating that not even his closest allies on Monday appeared willing to defend it.

“Europe is punishing us … we can’t make this agreement seem better than it is,” snapped the labour minister, Panos Skourletis, predicting that fresh elections would almost certainly have to be held later this year.

Whatever one thinks about the tactics of Greek Prime Minister Alexis Tsipras’s government in negotiations with the country’s creditors, the Greek people deserve better than what they are being offered. Germany wants Greece to choose between economic collapse and leaving the eurozone. Both options would mean economic disaster; the first, if not both, would be politically disastrous as well.

When I wrote in 2007 that no member state would voluntarily leave the eurozone, I emphasized the high economic costs of such a decision. The Greek government has shown that it understands this. Following the referendum, it agreed to what it – and the voters – had just rejected: a set of very painful and difficult conditions. Tsipras and his new finance minister, Euclid Tsakalotos, have gone to extraordinary lengths to mollify Greece’s creditors.

But when I concluded that no country would leave the eurozone, I failed to imagine that Germany would force another member out. This, clearly, would be the effect of the politically intolerable and economically perverse conditions tabled by Germany’s finance ministry.

Eurozone leaders said they would give Greece up to €86 billion ($96 billion) in fresh bailout loans as long as the government of Prime Minister Alexis Tsipras manages to implement a round of punishing austerity measures in the coming days.

The rescue deal—hammered out after 22 hours of at times acrimonious negotiations between the currency union’s leaders and finance ministers—requires the Greek left-wing government’s near-total surrender to its creditors’ demands. But it gives the country at least a fighting chance to hold on to the euro as its currency.

“The deal is hard,” Mr. Tsipras said after the summit, warning that the measures required by creditors will send the country’s economy further into recession.

European stocks rallied Monday on the news. The Stoxx Europe 600 rose 1.7% early in the afternoon, building on Friday’s hefty gains.

Monday morning, after 14 hours of talks among the euro area's finance ministers and an additional 17 hours among the group's leaders, the Greek prime minister came away with a much worse deal than the one he just persuaded Greek voters to reject. Now he must sell it to his parliament and people.

To be clear, for all the previous overheated talk of Greece's "humiliation" by the euro area countries that were bailing it out, this deal is indeed humiliating for Tsipras and Greece. The decision to set up a fund into which the country has to place 50 billion euros ($55 billion) worth of assets for privatization is the kind of thing that courts do to bankrupt companies ruled no longer competent to manage their own recovery.

The demand that Greece's parliament must, within three days, legislate for measures the government has in the past described as "criminal" and "terrorist" only underscores the degree to which Greece's economic sovereignty has been suspended.

At one point during marathon euro-zone talks in Brussels on the evening of July 12th, Alexis Tsipras was a few minutes late returning from a break. A rumour took flight: the Greek prime minister, facing brutal demands from his 18 fellow euro-zone leaders in exchange for an agreement to begin talks on a new bail-out, had fled the building. It turned out that he was in the bathroom.

That it seemed plausible for Mr Tsipras to have pulled a personal Grexit sheds light on the extraordinary pressure the prime minister faced during the all-night talks. At 6am, locked in discussions over a controversial privatisation fund with Angela Merkel, Germany’s chancellor, and François Hollande, the French president, Mr Tsipras did indeed come close to walking out. But spurred by pressure from Donald Tusk, the chair of the summit, the three eventually managed to forge a deal that could form the basis of a multi-billion-euro bail-out, Greece’s third in five years.

In exchange for the package, which could amount to as much as €86 billion ($95 billion) over three years, Mr Tsipras has had to sign up to precisely the sort of demands his Syriza party railed against during its successful election campaign in January. The proposals in a compromise deal offered by Mr Tsipras the previous week, most of which were overwhelmingly rejected by Greek voters in a referendum a few days earlier, mark just the beginning of the new deal. Those pledges, on matters like VAT and pension reform, must be legislated by the Greek parliament no later than July 15th. A week later further legislation must follow, including a total overhaul of Greece’s judicial system.

Arguing with Twitter hashtags is like urinating into a hurricane, and a particularly stupid and self-righteous hurricane at that. But sometimes, you just have to do these things anway, and dry yourself off afterwards. So here goes: no, this is not a coup.

#thisisacoup has been trending in various parts of the world for several hours over the latest Greek talks. Let’s skim over the awkward fact that Twitter and public opinion are not the same thing and deal with the argument – such as it is – that lies beneath the hysteria and hyperbole. A coup is what happens when a group of people, foreign or domestic, seize power in a country by force or coercion. I’ll allow a bit of poetic licence in political conversation about Greece, so I won’t bother with the literalist argument that it’s not a coup because there are no tanks or guns or men in uniforms involved.

Instead, the argument seems to boil down to suggesting that because the Greek government is about to sign up to policies advocated by foreign governments and international organisations, Greek democracy has been thwarted. After all, the Greek people voted against something like the proposed deal in a referendum last week. Isn’t it undemocratic for that view not to prevail here?

A few things that many of us took for granted, and that some of us believed in, ended in a single weekend. By forcing Alexis Tsipras into a humiliating defeat, Greece’s creditors have done a lot more than bring about regime change in Greece or endanger its relations with the eurozone. They have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union.

In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order. The best thing that can be said of the weekend is the brutal honesty of those perpetrating this regime change.

At least Alexis Tsipras avoided having to send Greece’s fairest one hundred maidens in tribute to Berlin. Apart from that, the Greek prime minister has had to concede on pretty much everything the other members of the euro demanded.

The details are still trickling out about the political agreement struck by the all-night eurozone summit, and there are a lot more decisions to be made in the coming days. But we can already draw three lessons. None is particularly edifying.

First, the decisions Europe’s busiest politicians find it appropriate to make are outright bizarre. The draft document that the eurogroup of finance ministers prepared for leaders on Sunday contains, among other things, a specific requirement to improve competition among . . . bakeries.

Perhaps the bakers of Greece need more competition. Perhaps, at a stretch, we can find some reason why this would contribute to a higher Greek growth rate. But we should gasp at the hubris of a class of European politicians who think both that their time is well spent doing this kind of micromanagement and that their preferred micro-policies are so conducive to growth they can overrule the domestic political process.

Europe’s ultimatum to Greece, demanding full capitulation as the price of any new bailout, marks the failure of a rebellion by a small, debt-ridden country against its lenders’ austerity policies, after Germany flexed its muscles and offered Athens a choice between obeisance or destruction.

Sunday’s statement on Greece by eurozone finance ministers will go down as one of the most brutal diplomatic démarches in the history of the European Union, a bloc built to foster peace and harmony that is now publicly threatening one of its own with ruination unless it surrenders.

The weekend’s power play also highlights the cracks among Greece’s creditors—especially Germany and the International Monetary Fund—as the cost of keeping Greece in the euro spirals out of control. The IMF has urged Europe to give Greece some debt relief, something Berlin has opposed. Part of the reason for Germany’s hard line now is that maximally tough austerity in Greece could reduce IMF pressure to write off Greek loans.

Sunday, July 12, 2015

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany’s good intentions after this?

An hour west of Athens, the pebbly beaches by turquoise waters and pine-covered mountains are nearly empty as the Greek sunbathers who normally pack them stay home amid fears their country's economy could implode.

Only a few dozen people sit down for a fresh grilled seafood lunch at the beachside restaurant Mary Cromba has owned for 15 years in the tiny village of Psatha. That's down from the hundreds she served most days last year in July.

Now beachgoers on day trips from the capital find parking spaces easily and haul their own food in coolers.

"Last year the beach was packed with people, from the sea to the parking lot," Cromba said, her eyes welling. "This year I had to let three employees go."

The consumer paranoia keeping customers away, however, is overshadowed by a Greek government crisis solution that Cromba said could eventually kill her business and many others that depend on domestic Greek tourism. Sharply higher sales taxes are coming, part of the governing Syriza party's promises to the 19-nation eurozone in return for a third multi-billion euro (dollar) bailout.

Sceptical euro zone finance ministers demanded on Saturday that Greece go beyond painful austerity measures accepted by Prime Minister Alexis Tsipras if he wants them to open negotiations on a third bailout for his bankrupt country to keep it in the euro.

The ministers postponed until Sunday a decision on whether to recommend starting talks on a new loan for Athens and sought further commitments first on product market liberalisation, labour laws, privatisation, state reform and more defence cuts, plus a promise to pass key laws next week, officials said.

The Eurogroup session will resume on Sunday, five hours before heads of state and government of the 19-nation currency area are to meet to decide on Greece's fate in the euro zone.

After the nine-hour session adjourned at midnight, Eurogroup chairman Jeroen Dijsselbloem told reporters the talks were very difficult and would resume at 11 a.m. (1000 BST).

"The issue of credibility and trust was discussed and also, of course, the financial issues," he said.

Saturday, July 11, 2015

Greece is widely viewed as an economic basket case. This recent article in the Financial Times discusses some fanciful proposals to fix the Greek economy. I don't doubt that Greece has performed poorly in recent years, but in one little known respect Greece is a shining star. In this post I will argue that it's by far the most successful economy in the world, of its type.

The italicized phase "of its type" is obviously the gimmick that I'm going to use to make my contrarian argument. But in the end I do have a serious point to make.

The Heritage Foundation publishes an annual ranking of 178 countries, in terms of economic freedom. This ranking has some flaws, but it gives a ballpark estimate of how "market-oriented" an economy is. Unfortunately its 10 categories include corruption and government spending, which may be only tangentially related to market freedom. Nonetheless, it's a useful place to start.

All the "normal" developed countries in the entire world except one have economic freedom index scores above 60. (By developed countries I mean IMF estimated GDP/person (PPP) for 2014 above $25,000. Seychelles is just barely developed but below 60. However it is a tourist island with less than 100,000 people. Equatorial Guinea is the other "developed" exception, but other than the massive oil production its citizens are desperately poor. So I excluded those two abnormal cases.)

A note from Greece’s finance minister to his prime minister warned that the country needed tough economic overhauls if its economy was to live up to its European aspirations.

“We can take on the task to truly lead the country to a European direction, on condition that the Greeks—those who are living well, not those who are suffering—will make the necessary sacrifices,” the finance minister wrote.

That was in September 1996. The finance minister was Alekos Papadopoulos and the prime minister was Konstantinos Simitis, but the letter could have been written today.

In the past quarter century, Greece has had a handful of reformist politicians who foresaw the problems that are now threatening the nation with bankruptcy.

Their reform proposals were fought by their colleagues in parliament and savaged by the media and labor unions. They invariably found themselves sidelined.

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by Petar Pismestrovic

About

This blog is dedicated to the understanding of the current Greek (but also European) economic, political and institutional crisis. It was created by Prof. Aristides Hatzis of the University of Athens, after many requests by his students who seek a source of reliable analysis on the Greek current affairs. Its aim is to post commentary and reports published mainly in the major U.S., European and Greek media and to encourage a rigorous discussion.